The course weblog for PA5113, State and Local Public Finance, at University of Minnesota

Tuesday, March 31, 2009

Expanding the Minnesota Sales Tax Base-Group One Project

The general sales tax in Minnesota was established in 1967.The current rate of 6.5% is higher than all neighboring states, but the base is narrower than most. The sales tax is levied on most goods with a few exceptions including clothing. Only four other states do not levy a tax on clothing.Further, Minnesota does not tax most services with a few exceptions.Although Minnesota has one of the highest rates in the nation, with only six other states having equal or higher general sales tax rates, many other states have local sales taxes which lead to a combined total of 6 to 11%.There are 119 exemptions from the sales tax base in Minnesota.By expanding the sales tax base to include clothing and many services currently excluded and lowering the sales tax rate, the sales tax would become a more stable revenue source.

The sales tax in Minnesota is fairly efficient-one reason being that it can be exported easily.According to the Tax Incidence Study conducted by the Minnesota Department of Revenue, 3.8% of the sales tax in Minnesota is paid by non-residents.Additionally, “sin” taxes, which can be imposed to incite or deter a particular behavior, are an efficient way of affecting change and altering behavior.

Sales taxes in general are regressive because they are not based on the ability to pay.While expanding the base would make it more regressive, there are ways to remedy this issue, such as lowering the rate and offering low-income clothing tax credits to individuals below a certain level of income.Additionally, since services generally have higher consumption levels for higher income levels, expanding the sales tax base to include more services would decrease the regressivity of the shift.

The sales tax base has been shrinking over time due to the shift from a goods-based economy to a service-based economy; increasing taxable services would help to stabilize the base. Additionally, internet sales have grown rapidly in recent years, and the inability to impose a sales tax uniformly across states on internet sales has contributed to the shrinking base.To address this issue, many states have joined the Streamlined Sales and Use Tax Agreement in an effort to make sales tax compliance and administration much easier.Moreover, ideas have been proposed this year that would expand the sales tax to downloaded music.The instability of this revenue stream makes for an unreliable revenue system.Expanding the base to include more inelastic goods such as clothing would improve the sustainability of the tax.

The sales tax in Minnesota is easy for individuals to comply with, and similarly, it is easy to collect.Because the system is already in place for collecting the sales tax, expanding the base would not make administrative feasibility any more difficult.Politically, however, expanding the base would be a difficult task.Lowering the rate and creating low-income credit options would make the political feasibility of expanding the base slightly easier.